Yellen Sends the Dow Higher, But the True Test For Stocks Lies Ahead

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Investors have waited for new Federal Reserve Chairwoman Janet Yellen's congressional testimony for days, and they seem to like what they're hearing this morning. The Dow Jones Industrials climbed nearly 80 points as of 11 a.m. EST as Yellen testified before a House panel, reassuring investors that she doesn't see the choppiness in markets around the world posing a big risk to U.S. economic growth. Reassuring investors that she would continue the approach of former Fed chief Ben Bernanke, Yellen signaled her focus on the labor market, noting that unemployment remains higher than the central bank thinks the economy can support.

Investors felt the impact of the testimony across the market, with 27 of the Dow's 30 stocks gaining ground following the beginning of Yellen's presentation. But looking specifically at the reaction of certain stocks within the blue-chip index, it's clear that the jury is still out on the Fed's policy going forward.

For instance, some financial stocks aren't up as much as the broader market, with American Express , Goldman Sachs , and Visa all rising a quarter-percent or less on the day. American Express recently stressed the importance of small-business customers to its overall success, with shareholders hoping that it will reach out to merchants to resolve past disputes. Better relationships with merchant customers will help American Express benefit more from higher consumer spending as the economic recovery continues. It's therefore relying on Yellen's policies to keep consumer finances healthy in order to drive that spending. Visa is in much the same boat, with its revenue even more dependent on spending volume rather than credit quality.

Yet what Yellen's testimony suggests is an economic isolationism that isn't consistent with the global economy. Goldman Sachs and JPMorgan Chase both operate in the global financial marketplace, and under certain circumstances it would be helpful for the Fed to act even if the direct interests of the U.S. weren't at stake. With Yellen showing at least some reluctance to embrace that cooperative view, it'll be interesting to see whether the Fed hesitates at a key moment if concerns spread beyond small emerging markets to capture a larger part of the global economy.

The true test for the Dow will come not from the Federal Reserve but from the overall rate of economic growth worldwide. With so many Dow stocks relying on global growth, it's important not to overstate the Fed's importance in determining whether the stock market will rise or fall from here.

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